REINSURANCE

CHAPTER 1

INTRODUCTION TO REINSURANCE

The term ‘Reinsurance, also termed as insurance of insurance’. Means that an

insurer who has assumed a large risk may arrange with another insurer to insure a
proportion of the insured risk. In other words, in the event of loss, if it would be
beyond the capacity of the insurer than this reinsurance process is restored to. In
reinsurance, therefore, one insurer insures the risk which has been undertaken by
another insurer. The original insurer who transfers a part of the insurance contract
is called the reinsured and the second insurer is called the reinsurer. Of course the
reinsurance has to pay reinsurance premium for risk shifted. For example, a man
wishing to insure his premium for 10 lakhs goes to an insurance company, which
will accept the risk if it is satisfied as to the condition of the property. But if it its
own limit is probably Rs 5 lakhs, it will arrange with another company to reinsure
or to take up so much of the risk as exceeds its limits, i.e. Rs 5 lakhs, so that if the
house is burnt down the original insurer would pay the owner Rs 10 lakhs. But
they would be recouped 5 lakhs, by the reinsurance offices. To be effective, the
reinsurance policy must be formulated after carefully considering all aspects of
the situation to which it is to be applied.

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MEANING:-

Reinsurance is a means by which an insurance company can protect itself

against the risk of losses with other insurance companies. Individuals and
corporations obtain insurance policies to provide protection for various risks
(hurricanes, earthquakes, lawsuits, collisions, sickness and death, etc.).
Reinsurers, in turn, provide insurance to insurance companies. It is a financial
management tool. It is always behind the high quality insurance program or a
complex commercial risk of any good insurer. Reinsurance industries are
maintaining upward surge all round growth, both in the domestic and global
fronts in the last few years. The untapped, both in life and non – life insurance,
particularly in growing economies like India and china, is the center of attraction
to leading players in insurance and reinsurance, thanks to globalizations and
liberalizations of financial services particularly in last decades. It is a tool of risk
management, mutually support and supplement each other in providing risk
mitigation to the individuals and organizations at micro level and to the country.
Reinsurance is instrument of risk transfer and risk financing. Reinsurance can be
described as contract made between an insurance company (insurer) and a third
party (reinsurer) where in the later will protect the former by paying losses
sustained by it under the original contract of insurance, unlike primary insurance,
the reinsurance mainly deals with catastrophic risk which are not only highly
unpredictable but have the potential capacity to cause huge devastation thereby
threatening the solvency of the insurance company.

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DEFINITION:-

Reinsurance is a transaction in which one insurer agrees, for a premium, to

indemnify another insurer against all are part of the loss that insurer may sustain
under its policy or policy or policies of insurance. The company purchasing
reinsurance is known as the ceding insurer: the company selling reinsurance is
known as the assuming insurer, or, more simply, the reinsurer. Reinsurer can also
be described as the “insurance of insurance companies” Reinsurance provides
reimbursement to the ceding insurer for lasses covered by the reinsurance
agreement. It enhances the fundamental objectives of insurance to spread the risk
so that no single entity finds itself saddled with a final burden beyond its ability
to pay. Reinsurance can be acquired directly from a reinsurance intermediary.

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 CHAPTER:-2

OBJECTIVES OF REINSURANCE:-

Insurer purchases reinsurance for essentially four reasons:

1) To limit liabilities on specific risks
2)To stabilize loss expanses
3)To protect against catastrophes; and
4)To increase capacity.
Different types of reinsurance contract are available in the market commensurate
with the ceding company’s goals.

1. Limiting liability:

By providing a mechanism in which companies limit loss exposure to levels

commensurate with net asset, reinsurance companies allows insurance companies
to offer coverage limits considerably higher then they could otherwise provide.
This function of reinsurance is crucial because they allow all companies, large
and small, to offer coverage limits to meet their policyholders’ needs. In this
manner, reinsurance provides an avenue for small-to-medium size companies to
compete with industry giants. In calculating an appropriate level of reinsurance, a
company takes in to account the amount of its available surplus and determines
its retention based on the amt of loss it cam absorb financially. Surplus, sometime
referred to as policyholders surplus, in the amount by which the asset of an
insurance exceeds its liabilities A company’s retention may range from a few
lakhs rupees o thousand of crores. The reinsurer indemnifies the loss exposure
above the retention, up to the policy limits of the reinsurance contract.
Reinsurance helps to stabilize loss experience on individual risks, as well as an
accumulated loss under many policies occurring during a specified period.

2. Stabilization:

Insurance often seeks to reduce the wide swing in profit and loss margins
inherent to the insurance business. These fluctuations result, in part, from the
unique nature of insurance, which involves pricing a product whose actual cost
will not be known until sometime in the future. Though reinsurance, insurance

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can reduce these fluctuations in loss experience, thus stabilizing the company
overall operating result.

3. Catastrophe protection:

Reinsurance provides protection against catastrophe loss in much the same way it
helps stabilize an insurer’s loss experience. Insurer uses reinsurance to protect
against catastrophes in two ways. The first is to protect against catastrophic loss
resulting from a single event, such as the total fire loss of large manufacturing
plant. However, an insurer also seeks reinsurance to protect against the
aggregation of many smaller claims, which could result from a single event
affecting many policyholders simultaneously, such as an earthquake as a major
hurricane. Financially, the insurer is able to pay losses individually, but when the
losses are aggregated, the total may be more than the insurer wishes to retain.

Though the careful use of reinsurance, the descriptive effect catastrophes have on
an insurer’s loss experience can be reduced dramatically. The decision a company
makes when purchasing catastrophe coverage are unique to each individual
company and vary widely depending on the type and size of the company
purchasing the reinsurance and the risk to be reinsured.

4. Increased capacity:

Capacity measures the rupee amount of risk an insurer can assume based on its
surplus and the nature of the business written. When an insurance company issues
a policy, the expenses associated with issuing that policy-taxes, agents
commissions, administrative expenses-are changed immediately against the
company’s income, resulting in a decrease in surplus, while the premium
collected must be set aside in an unearned premium reserved to be recognized as
income over a period of time. While this accounting procedure allows for strong
solvency regulation, it ultimately leads to decreased capacity because the more
business an insurance company writes, the more expenses that must be paid from
surplus, thus reducing the company’s ability to write additional business

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 CHAPTER:-3

FUNCTIONS OF REINSURANCE:-

There are many reasons why an insurance company would choose to reinsure
as part of its responsibility to manage a portfolio of risks for the benefit of its
policyholders and investors

(1)RISK TRANSFER

The main use of any insurer that might practice reinsurance is to allow the
company to assume greater individual risks than its size would otherwise allow,
and to protect a company against losses. Reinsurance allows an insurance
company to offer higher limits of protection to a policyholder than its own assets
would allow. For example, if the principal insurance company can write only $10
million in limits on any given policy, it can reinsure (or cede) the amount of the
limits in excess of $10 million. Reinsurance’s highly refined uses in recent years
include applications where reinsurance was used as part of a carefully planned
hedge strategy.

(2) INCOME SMOOTHING

Reinsurance can help to make an insurance company’s results more predictable

by absorbing larger losses and reducing the amount of capital needed to provide
coverage.

(3) SURPLUS RELIEF

An insurance company's writings are limited by its balance sheet (this test is
known as the solvency margin). When that limit is reached, an insurer can either
stop writing new business, increase its capital or buy "surplus relief" reinsurance.
The latter is usually done on a quota share basis and is an efficient way of not
having to turn clients away or raise additional capital.

(4)ARBITRAGE

The insurance company may be motivated by arbitrage in purchasing reinsurance

coverage at a lower rate than what they charge the insured for the underlying risk.

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(5) REINSURER’S EXPERTISE

The insurance company may want to avail of the expertise of a reinsurer in regard
to a specific (specialized) risk or want to avail of their rating ability in odd risks.

(6) CREATING A MANAGEABLE AND PROFITABLE PORTFOLIO OF

INSURED RISKS

By choosing a particular type of reinsurance method, the insurance company may

be able to create a more balanced and homogenous portfolio of insured risks. This
would lend greater predictability to the portfolio results on net basis ie after
reinsurance an would be reflected in income smoothing. While income smoothing
is one of the objectives of reinsurance arrangements, the mechanism is by way of
balancing the portfolio.

(7) MANAGING THE COST OF CAPITAL FOR AN INSURANCE

COMPANY

By getting a suitable reinsurance, the insurance company may be able to

substitute "capital needed" as per the requirements of the regulator for premium
written. It could happen that the writing of insurance business requires x amount
of capital with y% of cost of capital and reinsurance cost is less than x*y%. Thus
more unpredictable or less frequent the likelihood of an insured loss, more
profitable it can be for an insurance company to seek reinsurance.

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 CHAPTER:-4

ORIGIN AND DEVELOPMENT OF REINSURANCE:-

In the years 1871 to 1873, no less than twelve independent reinsurance

institutions were founded in Germany, of which very few survive today. The
pressure of competition led to unwholesome practices, and soon many of these
newly formed companies found themselves in dire straits. In branches of
insurance, other than fire insurance, we find no definite tendency in the '70's
toward the establishment of separate reinsurance facilities in Germany. Ernst
Albert Masius, in his "Rundschau" in 1846, deplored the lack of reinsurance
facilities in hail insurance. Even at the present time, this branch of the business
lacks adequate reinsurance service. Fundamentals in the most widely accepted
sense, reinsurance is understood to be that practice where an original insurer, for
a definite premium, contracts with another insurer (or insurers) to carry a part or
the whole of a risk assumed by the original insurer. By insurers we mean all
persons, partnerships, corporations, associations, and societies, associations
operating as Lloyd's, inter-insurers or individual underwriters authorized by law
to make contracts of insurance. We may define insurance as an agreement by
which one party, for a consideration, promises to pay money or its equivalent, or
to do an act valuable to the insured, upon the happening of a certain event or
upon the destruction, loss or injury of something in which the other party has an
interest. The insurance business is the business of making and administering
contracts of insurance. Insurance contracts are of two types those which engage
merely to pay a sum of money on the happening of an event, or merely to begin a
series of payments on or after the happening of a certain event, are contracts of
investment. Contracts of insurance which engage to pay money or its equivalent,
or the doing of acts valuable to the insured, upon destruction, loss or injury
involving things, are contracts of indemnity. And so, reinsurance may be second
insurance of
(a)Contracts of investment and/or
(b) Contracts of indemnity.
There may exist, therefore, two types of insurance business, depending upon
which of these two organic contracts the business engages to administer.

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THE FIRST INDEPENDENT REINSURANCE COMPANY ;-

In 1846, the first independent reinsurance company was founded in Germany, the
Cologne Reinsurance Company. This was the idea of Mevissen. He held that an
independent reinsurance company would be no competitor of the direct-writing
companies and that it was certain to be welcomed by and to receive a good
volume of business from those companies. Mevissen's idea of 1846 did not
mature, however. For various reasons the company did not begin business until
1852, and then only with the assistance of considerable French capital. This
marked the establishment of reinsurance as a specific, independent branch of the
business. Out of small beginnings, this company began to prosper and its example
began to attract other enterprising persons. During the first three years of its
business life the Cologne Reinsurance Company extended its operations in
Germany, Austria, Switzerland, Belgium, Holland and France, and then tried to
arrange treaty contracts with English companies. It seems that domestic English
reinsurance business, at that time, was quite unprofitable to the reinsures and the
Manager of the Cologne was obliged to keep out Of the English market. On June
24, 1853, a fire treaty was concluded between the Aachen and Munchener Fire
Insurance Company and its subsidiary, the Aachener Reinsurance Company. This
was an early example of a true "first surplus" treaty under which the reinsurer
was allotted one-tenth of every surplus risk, with certain modifications in respect
to various classes of risk enumerated in the contract. It is interesting to note that
the Aachen - Munchener Company had an earlier arrangement with L' Urbaine,
Paris.

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FIRST RECORDED REINSURANCE CONTRACT:-

The first reinsurance contract on record relates to the year 1370, when an
underwriter named Guilano Grillo contracted with Goffredo Benaira and Martino
Saceo to reinsure a ship on part of the voyage from Genoa to the harbor of
Bruges.
As early as the twelfth century, marine insurance began to be transacted through
the so-called "Chambers or Exchanges of Insurance," which had for their object,
first, the promotion of the marine insurance business on a solid basis and, second,
the settling of disputes arising among merchants and others concerned in
bottomry and respondentia contracts. In later years, these Chambers or Exchanges
of Insurance became corporate bodiesand instead of remaining confined to the
original function of regulating and registering insurance made by others, actually
undertook an insurance business themselves. With the establishment and
functioning of Lloyd's in 1710, there was a marked decline in the transaction of
insurance business through these Chambers or Exchanges. There is a suggestion
of reinsurance practice in the "Antwerp Customs" of 1609. Some mention of
reinsurance practice is to be found also in the "Guidon de la Mer," a code of sea
laws in use in France from a very early date. These marine regulations were
consolidated and published at Bordeaux in 1647 and at Rouen in 1671. The
author of the consolidations was said to have been Cleirac. With the shift of
centers of commerce from the south, southwest and west of Europe to the north,
England's foreign trade grew. Marine insurance followed in its wake. Some
underwriters found they could affect reinsurance with others. Underwriters were
accustomed to assign parts of risks to others at lower rates, and these reinsures
had hopes of finding other persons who would take parts of these risks at still
lower rates. This traffic in premium differences was so greatly abused that in
1746 it was forbidden. (19 Geo. II, c 37, Section 4). Under this statute,
reinsurance was permitted only if the party whose risk was reinsured was
insolvent, bankrupt or in debt and if the transaction was expressed in the policy to
be a reinsurance. The statute was more or less of a dead letter and was repealed
by 27 and 28 Vict.c 56, Section I on July 25, 1864

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 CHAPTER:-5

WHAT TO REINSURE?

The question of what to reinsure has to be considered from both the insurer's and
reinsurer's perspectives. Reinsurance replaces the risk of an uncertain large
payout, with a certain low payout. The insurer must decide how much of that
certain payout to accept in return for avoiding the risk of large payouts. That is,
the decision to reinsure is a question of how much risk to cede/retain based on
financial management of the trade-off between reinsurance cost and the risk of
pay out fluctuations. In deciding how much cover to offer, the reinsurer faces the
same issues that determine whether an insurer's risk is reinsurable as the insurer
faced in the original contract with the individual. Quite simply, if a risk is
insurable it is reinsurable. Decision making process arises because, in practice,
decisions on insurability are made for non-underwriting reasons — for example,
market building and political reasons. Therefore, the reinsurer needs access to the
data on which the original insurances decisions was made.
If that data is not available, the reinsurance market can fail to offer reinsurance,
not because they risk is intrinsically not reinsurable but because the default
decision is to not reinsure. This default is to err on the side of caution.

WHY IS OBLIGATORY REINSURANCE NEEDED?

It is not for nothing that the laws of the land prescribe a minimal portion of the
insurance business to be compulsorily reinsured with another insurer / reinsurer.
The insurance business is inherently and intrinsically risky as the losses are of a
probabilistic nature, and when they take place, they do so with a randomly
varying frequency. This is more so, in the case of new or small insurers, or where
existing insurance companies underwrite new classes of business. In such cases, a
certain portion of their insurance risk cover must, in their own interest, be
reinsured to ensure that the risks are spread.

In India, at least till the market attains maturity, it is essential for compulsory /
obligatory cessions to remain in the statute book (or alternatively in subordinate
legislations likes insurances regulations).

In medium size and mega value risks, it is inevitable that certain cessions are
placed on an optional (what we in insurance business parlance refer to as

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facultative) basis. Facultative reinsurance arrangements always carry a lower rate
of reinsurance commission. For example, in the fire businesses an insurer gets 30
per cent reinsurance commission through obligatory cessions, whereas on high-
value risks the optional portion fetches anywhere between 17 per cent and 25 per
cent depending on market conditions. Thus, the insurer stands to gain
substantially on direct cessions.

Obligatory cessions apply to all policies across the board. Motor insurance,
particularly, in India is a bleeding portfolio. An insurer, therefore, has the
advantage of minimizing his losses in motor insurance by at least 20 per cent,
thanks to the obligatory cessions. For the national reinsurer, the loss in the motor
portfolio due to the obligatory cessions is so high, that it often wipes out the
profit earned in other classes of business.

As mentioned earlier, in the Indian market, which has a combination of new,

small and existing insurers underwriting new businesses, the 20 per cent
obligatory cessions has always been a matter of comfort. It is a source of
reassurance to the insured as well.

Therefore, obligatory cessions create an automatic Obligatory cessions ensure

that a minimum of 20 per cent (subject to certain quantum restrictions in fire and
engineering) premiums are retained within India provided, of course, the
reinsurer again does not cede them on proportionate basis.

In case of perils like earthquake and terrorism, among others, foreign reinsurers
are usually unwilling to provide full cover. This has paved way for market pools
to provide the capacity / cover. Market pools are also a form of obligatory
cession, normally managed by the national reinsurer.

However, it must be conceded that this concept of obligatory cession should be

progressively phased out as the market grows and gets integrated with world
markets.

The concept of obligatory cession may seem restrictive to insurers, who feel that
they should be given the freedom to choose their own reinsurer. Even so,
regulators must ensure that even if risks were to be reinsured abroad in the
absence of obligatory cessions, the premium loss on account of such cessions
should be replaced by corresponding 'inward acceptances'. Through this, they
achieve:

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• good spread of risks geographically and class-wise

• foreign exchange cost is restored

• insurers also learn and get experience in the foreign reinsurance business pacify
to the extent of the amount ceded, so that the direct insurers do not become
vulnerable to the vagaries and whims of the foreign reinsurance market and
brokers.

WAYS TO REINSURE

There are three basic ways in which MIU can be reinsured:

- Pooled reinsurance — MIUs join together in a relationship that links them only
through the pool. There is typically some form of standardization across the pool
to ensure transparency and avoid one scheme profiting at the expense of another.
The more heterogeneous the MIUs the better the pool advantage, and the more
regionally dispersed, the lesser risk of fluctuation due to epidemic or natural
disaster. Pooling enables better use of reserves.

-Reciprocity also enables a better use of reserves, but in this case the MIUs are
known to one another and probably have other ties and commonalities.

- Subsidies from government or donors — this may sustain the MIU, but may
also send inappropriate signals to the key players. The lessons from previous
insurance experience indicates that subsidies can worsen or alleviate market
failure depending on where into the system they are paid, that there may not be a
perfect method to subsidies, and no matter how well run an MIU subsidy may be
essential in the long run due to the gap.

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 CHAPTER:-6

TYPES OF REINSURANCE

(1) PROPORTIONAL

Proportional reinsurance (the types of which are quota share &surpl us

reinsurance) involves one or more reinsurers taking a stated percent share of
each policy that an insurer produces ("writes"). This means that the reinsurer will
receive that stated percentage of each dollar of premiums and will pay that
percentage of each dollar of losses. In addition, the reinsurer will allow a "ceding
commission" to the insurer to compensate the insurer for the costs of writing and
administering the business (agents' commissions, modeling, paperwork, etc.).
The insurer may seek such coverage for several reasons. First, the insurer may
not have sufficient capital to prudently retain all of the exposure that it is capable
of producing. For example, it may only be able to offer $1 million in coverage,
but by purchasing proportional reinsurance it might double or triple that limit.
Premiums and losses are then shared on a pro rata basis. For example, an
insurance company might purchase a 50% quota share treaty; in this case they
would share half of all premium and losses with the reinsurer. In a 75% quota
share, they would share (cede) 3/4 of all premiums and losses. The other form of
proportional reinsurance is surplus share or surplus of line treaty. In this case, a
retained “line” is defined as the ceding company's retention - say $100,000. In a 9
line surplus treaty the reinsurer would then accept up to $900,000 (9 lines). So if
the insurance company issues a policy for $100,000, they would keep all of the
premiums and losses from that policy. If they issue a $200,000 policy, they would
give (cede) half of the premiums and losses to the reinsurer (1 line each). The
maximum underwriting capacity of the cedant would be $ 1,000,000 in this
example. Surplus treaties are also known as variable quota shares.

(2) NON-PROPORTIONAL

Non-proportional reinsurance only responds if the loss suffered by the insurer

exceeds a certain amount, which is called the "retention" or "priority." An
example of this form of reinsurance is where the insurer is prepared to accept a
loss of $1 million for any loss which may occur and they purchase a layer of
reinsurance of $4 million in excess of $1 million. If a loss of $3 million occurs,
the insurer pays the $3 million to the insured, and then recovers $2 million from
its reinsurer(s). In this example, the reinsured will retain any loss exceeding $5
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million unless they have purchased a further excess layer (second layer) of say
$10 million excess ofs$5smillion. The main forms of non-proportional
reinsurance are excess of loss and stop loss. Excess of loss reinsurance can have
three forms - "Per Risk XL" (Working XL), "Per Occurrence or Per Even XL"
(Catastrophe or Cat XL), and "Aggregate XL". In per risk, the cedant’s insurance
policy limits are greater than the reinsurance retention. For example, an insurance
company might insure commercial property risks with policy limits up to $10
million, and then buy per risk reinsurance of $5 million in excess of $5 million.
In this case a loss of $6 million on that policy will result in the recovery of $1
million from the reinsurer. In catastrophe excess of loss, the pedant’s per risk
retention is usually less than the cat reinsurance retention (this is not important as
these contracts usually contain a 2 risk warranty i.e. they are designed to protect
the reinsured against catastrophic events that involve more than 1 policy). For
example, an insurance company issues homeowner's policies with limits of up to
$500,000 and then buys catastrophe reinsurance of $22,000,000 in excess of
$3,000,000. In that case, the insurance company would only recover from
reinsurers in the event of multiple policy losses in one event (i.e., hurricane,
earthquake, flood, etc.). Aggregate XL afford a frequency protection to the
reinsured. For instance if the company retains $1 million net any one vessel, the
cover $10 million in the aggregate excess $5 million in the aggregate would
equate to 10 total losses in excess of 5 total losses (or more partial losses).
Aggregate covers can also be linked to the cedant's gross premium income during
a 12 month period, with limit and deductible expressed as percentages and
amounts. Such covers are then known as "Stop Loss" or annual aggregate XL.

(3) RISK ATTACHING BASIS

A basis under which reinsurance is provided for claims arising from policies
commencing during the period to which the reinsurance relates. The insurer
knows there is coverage for the whole policy period when written. All claims
from cedant underlying policies incepting during the period of the reinsurance
contract are covered even if they occur after the expiration date of the reinsurance
contract. Any claims from cedant underlying policies incepting outside the period
of the reinsurance contract are not covered even if they occur during the period of
the reinsurance contract.

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(4) LOSS OCCURING BASIS

A Reinsurance treaty from under which all claims occurring during the period of
the contract , irrespective of when the underlying policies incepted, are covered.
Any claims occurring after the contract expiration date are not covered. As
opposed to claims-made policy. Insurance coverage is provided for losses
occurring in the defined period.

(5) CLAIMS MADE – BASIS

A policy which covers all claims reported to an insurer within the policy period
Irrespective of when they occurred.

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 CHAPTER:-7

REINSURANCE INDUSTRY

As one of the business market research paper has put it “Reinsurance is an

international , multi billion dollar industry that is vital to the financial stability of
all types of insurance companies.” It is a method of ceding part of the financial
risk the direct insurers assume by accepting risk from risk owners, particularly
mega risk, mainly against the earthquakes, tsunami, terrisom, etc. However, in
terms of magnitude / size, reinsurance is highly complex global business and for
example, it accounts for more than 9% of the total premiums generated from
property.

The whole mechanism of insurance and reinsurance being a dynamic process.

The electronic media and internet technology have substantially added to the
efficiency and simplification of mechanism of reinsurance operations. The
increased use of information and internet technology by the insurance companies
have made collecting, compiling, and data warehousing of updated technical data
on millions of mega risk faster and also revolutionized the procedural input on
underwritings, accounting and claims processing and settlement by both primary
insurance and reinsurance.

The new type of electronic system specific transactional methodology since put in
place has cut short the embarrassing delays in reinsurance acceptance, cessions
and adjustment or settlement among the participating companies. Looking to the
latest trend and overwhelming success rate of multi benefit life insurance
products like ULIPs and pension plans, which combine risk cover with
investment components.

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GENERAL INSURANCE COMPANY (GIC) :-

GIC, the sole reinsurance company of our country, by virtue of its experience and
exposure in providing reinsurance support and guidance to its erstwhile non life
insurance subsidiaries for more than three dacades, has excellent organizational
and technical skills in taking care of reinsurance arrangements for the present
insurance market of India – life and non – life and has since adequately
established itself as the national reinsurance leader. Mean while, GIC reinsurance
as part its strategy to expand its operation and to make its present felt globally has
recently upgraded its representative offices in London and Dubai. Incidentally,
the sole national reinsurer of india also has another representative office in
Moscow. GIC has developed necessary skills and has qualified manpower to take
care of growing needs of the expanding Indian industry.

For the financial year 2006-07, through GIC reinsurance recorded an overall
underwriting loss of Rs. 75.95 cr ,it has achieved a robust growth of more than
156% in its net profit at Rs. 1531 cr ,as against rs.598 cr during the corresponding
period period in the previous year. GIC ranks 2st among non life insurers with a
net worth of $1.4 bn. As per GIC reinsurance chairman,it is positioned as the lead
reinsurer in the Afro-Asian region and other emerging economies. during 2006-
07, the premium income for GIC Re went up from Rs. 200 toRs.270 cr. It is
learnt that its international reinsurance business amounted to 22% of its total
turnover for the year.

3rd Asian Reinsurers’ Summit was organised by GIC of India, in February 2003
at Mumbai. Eleven reinsurers from Japan, China, Hong Kong, Singapore,
Taiwan, Korea, Indonesia, Malaysia, Singapore, Philippines and India
participated in the summit with the aim of reinforcing of strengths for mutual
development, undertaking joint research, data sharing & information management
and furthering business co-operation

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CHALLENGES FOR REINSURANCE MARKET :-

Prior to nationalization in 1973, the reinsurance market in India had a much

diluted presence in the industry. The foreign companies operating in India were
managing their risk portfolio with their parent companies overseas. To safeguard
the identified and limited risk of insurance companies, local companies created
India Insurance Pool.

The developments after nationalizations insurance industry created a new body

with the merger of India Reinsurance and Indian Guarantee for its reinsurance
business to support the technology and engineering mega projects.
Some of the major issues in accounting have been undertaken considering the
recent developments in the business. The return from foreign companies are to be
incorporated when received upto 31st march and returns from indian companies
and state insurance funds received as of different dates are accepted upto the date
of finalization of accounts.

Arising out of the occurrence of disastrous like terrorist attack on world trade
center etc. which brought about unprecedented loss of life and property and
thereby unbearable liability and operational crisis onto the reinsurance industry
world over.

There is a wide difference between the rates required by the international

reinsurers and those charged by the domestic insurers leading to the price
affordability as an issue. Where there are tariffs, like a case of India, the
customers cushioned from the rate of increase in the international market. Such
impositions are required to be self – absorbed.

The Indian market is in absence of the competitive environment of the

international reinsurers at the local level, and has depended mainly on the
domestic market understanding and basing probability of business ceded rather
than on underwriting and risk information criteria.

A regular interaction for regional co-operation has to be developed to set up a

framework of the areas of co-operation and the mechanism, with this India has to
compete with the global reinsurance giants. However, the tightening of
reinsurance premium in India has been attributed to the low volumes. As market
become global, country regulators face challenges in policy formulation for
creating a market that develops and keeps confidence of the industry and for
keeping international trade regulation intact.
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WHAT INDIA NEED TO DO?

The opening up of the market as a whole and insurance sector in specific has
created a potential for the Indian companies also to pool up bigger fund to
support the capital intensive sectors. The market has to ensure that the domestic
companies increase their own capacities and introduce more strict guidelines as
first – hand risk carriers. Insurance companies have to establish the business
relations with their reinsurer to prevent them from worldwide reinsurance cycle
that affects on capacity and stability.

Worldwide the reinsurers are becoming strict on technical results of the

insurance, therefore a disciplinary watch is required on insurance business as it is
the base of reinsurance. The above problems or difficulties are not very new for a
sector that is the transition.

Since, some of the products are losing the importance (like proportional treaty), it
is necessary to have sufficient premium income to maintain the balance and to
bear unexpected losses. To have the best rates and terms from reinsures, the risk
profile and exposure to catastrophe risk information transfer to reinsurer should
be comprehensive and reliable.

Due to the market opening through the WTO operation, there is net outflow
expected in the premium from the developing countries as they have a low
capitalization in most of the insurance companies. This could lead to weaken the
objective of the serious efforts for the regional cooperation developments
amongst the nations.

The efforts towards developing a synergetic approach to model a successful

cooperation will require to work on many areas simultaneously rather than
organizing efforts only for one direction and loosing others, they are as follow:

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• Pooling of financial resources

• Creating Investment opportunities

• Pooling of technical resources

• Joint ventures, alliance and partnership

• Research and developments

• Pooling of information

• Developing standard accounting system for business

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GLOBAL POSITION :-

Arising out of the occurrence of disastrous like Hurricance,terrorist attack on

world trade center etc. which brought about unprecendented loss of life and
property and thereby unbearable liability and operational crisis onto the
reinsurance industry world over. The huge amount of losses incurred, in the
aforesaid events, forced the reisurers to hike the rates substantially and also
change the terms and conditions of reinsurance arrangements. The law and
regulations governing reinsurance operation in some of the advance and
developing countries have seen few changes, making them more stringent in
reinsurance acceptance and compulsory cessions to the local reinsurance
companies.

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 CHAPTER:-8

REINSURANCE UNDERWRITING

Reinsurance underwriting is the process of building up a portfolio of assumed

risks; ii involves selecting the accounts and defining the conditions/rates at which
the accounts are to be accepted for assumption of risk. It is one of the most vital
functions of the management and the ultimate results of the company depend
upon the efficacy. Several arguments have been put forth as to whether
underwriting is an art or a science in fact it several traits of both – one has to
consider the previous results, make quantitative/qualitative analysis of the results
of the previous years. At the same time it involves a g deal of the underwriter's
intuitive judgment and often his gut-feeling. In the long run it is the correct and
positive dynamics of underwriting that decide the success of a reinsurance
company, just as much as that of an insurance company. Underwriting being a
function of such vital importance holds the key to the success of an organization.
History is witness that very rarely has a reinsurance company got into difficulties
due to a poor investment decision but a major underwriting loss can critically
impair the company and throw it out of business.

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FACTORS THAT AFFECT REINSURANCE BUSINESS

For underwriting to be effective in the long run, a clear understanding of the

reinsurance contract is absolutely essential for both the parties. The cedent
company needs this understanding to plan its risk-retention, types of reinsurance
required etc. For the reinsurer, it is necessary to plan for his portfolio, with an eye
on the possible accumulations of losses, underwriting a single large risk etc. After
identifying the type of contracts that a reinsurance company has to underwrite
during a period, it has to identify the various sources of business that it wanes to
get involved in. The different sources of reinsurance business are:

•Domestic direct underwriting companies

•Foreign direct underwriting companies

•Other reinsurance companies

•Reinsurance brokers

Domestic business has various advantages like low acquisition costs, easy
manageability etc and further it is free from ether complications like adverse
fluctuation of foreign exchange, economic instability of the country etc. It suffers
from the drawbacks of low volume and spread of business, which is essential to
build up a stable and profitable portfolio. Further, the expertise and experience of
the reinsures that are spread across the globe are also denied in case of domestic
business. Or the other hand, overseas business has the advantages of wide
geographical spread but the cost of maintenance may be higher. Further, other
complications like difference in language, legal systems, market practices and
exchange control regulations may surface hence, a healthy balance of domestic
and overseas business will enable the reinsurer to develop a strong, stable and
profitable portfolio. Retrocession treaties among various reinsures could be a
source of underwriting international business with a balanced geographical
spread. But the company should closely watch for higher costs of acquisition and
low profitability. One possible solution to overcome these difficulties is to
develop business through intermediaries or brokers, subject to cost of brokerage,
delays in remittances and underwriting being in control. Another aspect which
has to be considered in finalizing a reinsurance contract is the class and spread of
risks. The reinsurance company will have to make a selection of risks depending
on the size and intensity. A single aviation portfolio may consist of a very small
number of large risks, whereas there can be several small household burglary
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accounts with limited risk exposure. Similarly, even within a class, mere can be
variation in risk exposure, like fire policy for residential dwellings as against that
of a large industrial undertaking or industrial complexes. Hence a proper balance
will have to be struck between various classes; and within a class, between
various risks.

CLASSES OF BUSINESS POLICY

It is of paramount importance for an underwriter to know at the outset as to what

classes of risks are to be covered viz. Property, Casualty, etc. It must be ensured
that the particular class is a genuine insurance risk which can be defined and
quantified properly so that premium considerations do not lead to avoidable
conflicts. Further, within the class, method of reinsurance whether
proportional/non-proportional, facultative/treaty etc., lias to be selected,
depending on the reinsurer choice as well as suitability.

DESIGNING A REINSURANCE PROGRAM

Having decided a particular class and amount of business to be involved in, a

company must decide some form of reinsurance which it requires. Basically the
facultative form is more cumbersome, time- consuming and also more expensive.
As such it is always wiser to consider a suitable combination of treaties.
The ultimate choice as regards a particular treaty or a combination of treaties
would depend upon whether the portfolio is exposed to large individual losses or
accumulation of losses from sporadic, isolated events. Apart from the above,
other considerations that have a bearing on a company's choice of portfolio are:

•Administrative costs and ease of operations.

•Effect on company's net retained premium income

•Whether it wishes to have reciprocal arrangements with

other insurers.

In case of large risks on classes of business such as Fire, Engineering, Marine

hull, etc., a surplus treaty would be the best option for the cedent company as it
would enable retention of a large part of premium income. However, because of
the special skills involved, a company might be inclined towards reinsuring the
business on a risk excess of loss. Further, the administrative hassles of
maintaining a squibs treaty are more as compared to those of quota share or
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excess of icss. It would also enable the company to attain a higher rate of
commission on a quota share treaty. The excess of loss treaty is also very
beneficial in that it is very simple to operate. The company after deciding on the
amount of excess of loss cover protection need not go for any reinsurance on
individual risks. If the company is in the habit of issuing policies for unlimited
liability (motor third party), the final layer of excess of loss cover should also be
for an unlimited amount.

An insurance company which is also involved in inward reinsurance can increase

its capacity to accept large reinsurance risks. However, in order to keep a check
on its net retention, retrocession facility should be made use of. Depending on its
net retention ability, the company can retrocede the surplus amounts to
retrocession Aires, for which it may make use of the quota-share retrocession
policy. For the protection of its net retained part an excess loss cover would be
useful. Need for reinsurance is paramount because a company has to target the
maximum amount of business in order to ensure growth and achievement of its
goals. However, while assuming high amounts of risks it is possible for the
growth to sustain large losses which may have an impact on the capital reserves.
To avoid this, an insurance company has to necessarily go for reinsurance.
Several obligatory treaties can help achieve this requirement by providing
automatic cover with minimum exclusion. Ii is particularly useful for a new
insurance company with a low retention capacity. While arranging for
reinsurance, a company must concentrate on good security of the reinsurer. Good
security amounts to power of withstanding any large risk and not the offer of
large commissions and lower premium rates. Similarly, the reinsurer also judges
whether the cedent company is worth entering into a contract with. Mutually, the
two should decide upon the level of reinsurance arrangements and the rates at
which it is to be finalized.

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RECIPROCAL BUSINESS

A company may seek reciprocal arrangement with another reinsurer in order to

have a spread of its business and also to maintain a large volume of premium
income, without affecting its solvency strengths. However a totally reciprocal
arrangement (100%) is not possible and the reinsurance companies should aim at
a mutually agreeable balance. For entering into reciprocal business, a company
should look for the following points.

• Companies with whom reciprocal business is being planned should be

fundamentally strong, should possess good business ethics, and should have a
good history of treaties. Besides, a thorough knowledge of the conditions of the
country in which a party in is operating, is absolutely essential.

•The treaties proposed to be exchanged should be reasonably balanced

with an acceptable ratio of

• Host of other services apart from providing reinsurance coverage

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